At the Intersection of War and Economy
www.washingtonpost.com Sunday, February 23, 2003; Page H02
With premium gasoline at $2 a gallon and rising in Washington and other metropolitan areas, the economy and the seemingly impending war suddenly became one story.
A month-long national strike in Venezuela, colder-than-usual weather in the eastern United States and speculation by energy traders that a U.S. attack on Iraq could send prices skyrocketing have contributed to the 30-cent-a-gallon increase in pump prices over the past 10 weeks. But also a factor is a chronic short supply, reflecting the reluctance of major oil companies in recent years to increase investment in new sources of oil outside the Middle East. The companies fear that crude prices are likely to fall back below $25 a barrel before long, making it difficult to earn a decent profit from oil that will almost certainly be more expensive to find and pump.
It didn't help the mood of energy markets Friday when a barge carrying 4 million gallons of refined gasoline exploded at an Exxon Mobil terminal on Staten Island, sending clouds of dark smoke over New York Harbor and unfounded rumors of a terrorist attack ricocheting around trading rooms. This is a market in which small changes in supply or sentiment can result in big changes in price, and panic buying by nervous traders Friday drove the price of a gallon of crude for delivery next month above $37 a barrel before settling down to $35.50.
Politicians and economic forecasters have learned that they ignore big swings in fuel prices at their peril. It is not just that energy is a cost that affects the price of producing just about everything -- just look at the 1.6 percent increase in producer prices in January. Nor can its importance be fully explained by the fact that, in a country that relies on imports for most of its energy, much of the increase in the price of oil and gas flows outside the country. Just as significant, history shows that big increases in fuel prices seem to have an outsized effect on the psyches of consumers who get angry and apprehensive when the pump rushes past $40 as they stand there filling up their Chevy Blazers.
Don't look for relief anytime soon. With stocks of crude oil and refined products now below their five-year averages, even the disappearance of the war premium could be largely offset by the normal seasonal effect that comes as refiners begin to build gasoline inventories in anticipation of the summer driving season.